06 December 2012

A TAXING SITUATION

The congress and the President are now at an impass over just how to get more taxes out of the “rich.” The President thinks this consists of anyone making over $250,000 a year, but even some in his own party find this hard to swallow. Senator Schumer thinks it should apply only to those making over a million, apparently thinking of his high-income, hypocritical liberal constituents, given what the cost of living is here in New York. The Republicans, on the other hand, are willing to raise revenue by changing the tax code to eliminate or limit various deductions for the wealthy, while lowering rates across the board.

This may seem like a trivial difference to some people, especially in the affluent media, given that either way the government is going to get more tax revenue from those who are relatively well off, the Republicans having conceded as much already. But the underlying philosophies of each position stand in clear opposition. It essentially boils down to who should control other people’s money. The President’s position is that the rich should pay “more” on the basis of “fairness” and equality. Given that this kind of logic seems to appeal to a current majority of the public, he seems prepared to demagogue this issue over the “fiscal cliff,” even if alternative policies might actually raise more revenue with lower rates, calculating that with media support, he can successfully blame the consequences on the Republicans. They, in turn, argue, rather cogently I think, that this will only reduce investment and economic growth, particularly by burdening small business owners and confiscating capital from more productive uses.

It then ultimately becomes a question of who should spend the money- the people it belongs to or the government. It is as much about power and the direction of things as it is about revenue. The Democrats want it for social purposes, while the Republicans reject that for economic reasons, as well as based upon opposition to expanded government programs and power. The President essentially wants to maintain the current tax code and simply raise income tax rates, while the Republicans want to maintain or reduce current rates and change the tax code. In this they have a strong argument; unfortunately they are not very good at articulating it.

The current tax code is full of deductions, exemptions, and benefits skewed towards particular interests (talk about fairness), that reduce the taxes they pay and raise everyone else’s. This results in crony capitalism, rewarding those favored by the government at the expense of others. The advocates of such policies mean well, to the extent that these favors are designed to get people to do things they otherwise would not do, or that make no economic sense on their own. This favorable treatment is designed to provide “incentives” to achieve various political goals, such as green energy through Solyndra-type outfits. Thus, the government then effectively controls how money is spend both indirectly, as well as directly, by taxing all those who are not favored more. It means more power over decision-making, based upon the assumption that somehow politicians and government bureaucrats know better how a business should invest, than its owners.

I’m not going to get into all the reasons these schemes frequently fail, or the distortion of investment decisions, but will address them on the liberals’ own terms: it’s just not fair. What would be fair is a system where the same rates apply to everyone without exception, even if they are progressive, and where no one could curry favors from the state. If all these exemptions and favors were eliminated, not only would there be less economic distortion, but then the rates for everyone could be lowered across the board. The Republicans have a strong argument here, provided they stick to it and don’t dole out favors themselves. Under the present system, to paraphrase Pericles, you may not be interested in government but government is interested in you. As long as exceptions and favors are done by the state, supposedly in the public interest, it forces organizations to be involved politically. This inevitably invites corruption.

As bad as all this is on individual taxes, it is even worse when it comes to corporate taxes. Today the US has the highest corporate income taxes in the world, nominally, but exclusion and deductions effectively lower them for some who are favored. Eliminating the goodies for crony capitalists would allow rates to be significantly lowered across the board, thus encouraging more investment in this country. Again, by simply being fair, everyone would benefit.

But there are other interests at play besides the private sector, such as state and local government, and nonprofit organizations. Reducing, or eliminating deductions for state and local taxes usually leads to howls of protest from representatives of high tax states like New York. These concerns are, however, misplaced. New York sends far more taxes to Washington than it gets back. Thus logically every time a representative from here votes for more federal programs and taxes they are effectively voting against the interests of New York taxpayers. That is a strong argument that the Republicans in this state are unfortunately too inept to make, and thus keep losing elections. Reducing deductions for “charitable” contributions also results in protests from nonprofit organizations, who fear they might lose revenue. Never mind that wealthy donors often “contribute” via dinners and social events, they also get “naming” rights. In my view when a billionaire gets to plaster his name all over the place on something, usually in proportion to his ego, he should not get a tax benefit for it as well. Real charity is giving without expecting anything in return. People would still be charitable, it would just be on less of an industrial scale.

I’m not advocating eliminating any of these deductions or particular policies, but would insist than any increase in revenue be exclusively devoted to debt reduction. Beyond that, I would point out that any real reform also has to include state and local taxes, given how onerous, i.e. property taxes are for many people. I would suggest that we eliminate or drastically reduce taxes on all the necessities of life, such as food, clothing, shelter, and medical care. There could be limitations and caps to avoid rewarding ostentatiousness. Instead let everything beyond these elements be taxed, most of which is elective and not essential to life. Thus, for example, we ought to instead have an entertainment tax, (take that Hollywood) which would be relatively painless, given that it would be based upon optional expenditures. No one can seriously argue that entertainment is an essential expense at present. Furthermore, if society continued to prosper (and this should delight liberals) the list of nontaxables might even eventually be expanded to include some “social” goods, at least as long as it does not increase debt or raise taxes. It is far preferable that these things be provided and decided by individuals themselves rather than the government. That means individual choice instead of state direction. This is only a preliminary proposal, but accompanied by a rational tax system that treats everyone equally, we could reduce overall taxation, increase growth, and pay down the debt. After all, it is only fair.